Question

As discussed in this chapter companies, when evaluating their business practices, can use managerial accounting concepts to calculate variances as it relates to Direct Materials, Direct Labor and Manufacturing Overhead.

Challenge: Give an example of a Company and a type of variance they would likely calculate and evaluate (as related to this chapter) and provide an explanation of why the variance could occur.

As an example: In the current world environment (i.e. Covid 19) companies are likely using employees to do tasks they do not normally perform. For instance a construction company might be using a light crew to complete a job and be using supervisors to do more work than normal as they are trying to keep crews to a minimum. As such the work is being completed by a worker who is paid more than normal. However in light of restrictions the Company is able to continue operations and maintain revenue streams.

[please note that you do not have to relate the example to Covid-19]

Answer 1

Barley, Inc. Production

Barley, Inc., produces a product and has the following as standard costs per unit for materials and labor:

For the month of October, the following information was gathered related to production:

Compute:

1. The materials price and quantity variances
2. The labor rate and efficiency variances

Provide possible explanations for each variance.

Solution

A.

Materials price variance:

$50,000 unfavorable = ($16* – $15) × 50,000 lb.

*$800,000/50,000

An unfavorable materials price variance occurred because the actual cost of materials was greater than the expected or standard cost. This could occur if a higher-quality material was purchased or the suppliers raised their prices.

Materials quantity variance:

$150,000 unfavorable = (50,000 lb. – 40,000* lb.) × $15 per lb.

*4 lb. × 10,000 units

An unfavorable materials quantity variance occurred because the pounds of materials used were greater than the pounds expected to be used. This could occur if there were inefficiencies in production or the quality of the materials was such that more needed to be used to meet safety or other standards.

Materials inputs:

B.

Labor rate variance:

$50,000 favorable = ($18* per hour – $20 per hour) × 25,000 hours

*$450,000/25,000

A favorable labor rate variance occurred because the rate paid per hour was less than the rate expected to be paid (standard) per hour. This could occur because the company was able to hire workers at a lower rate, because of negotiated union contracts, or because of a poor labor rate estimate used in creating the standard.

Labor quantity variance:

$100,000 unfavorable = (25,000 hours – 20,000* hours) × $20 per hour

*2 hours × 10,000 units

An unfavorable labor quantity variance occurred because the actual hours worked to make the 10,000 units were greater than the expected hours to make that many units. This could occur because of inefficiencies of the workers, defects and errors that caused additional time reworking items, or the use of new workers who were less efficient.

Labor inputs:

Explaining Differences in Expected and Actual Operational Outcomes